The debt limit resurfaces, but for now, there's no cause for concern.
The debt limit resurfaces, but for now, there's no cause for concern.
The soon-to-be President Donald Trump is pushing for GOP lawmakers to handle the debt limit issue before his inauguration on January 20, but due to potential delays, the US might be months away from a possible first-ever default on its financial commitments.
The current debt ceiling, representing the amount of debt remaining at the end of the previous day, was around $36.2 trillion as of recent weeks, an increase from $31.4 trillion in June 2023 when the cap was suspended as part of the bi-partisan Fiscal Responsibility Act.
Despite approaching the limit, the nation won't technically exceed it until between January 14 and January 23, providing the Treasury Department with a short window to continue borrowing to cover federal expenses without delay. The debt level is projected to decrease by $54 billion that day due to scheduled bond redemptions, as mentioned in a letter sent by Treasury Secretary Janet Yellen to congressional leaders.
The US will then have to implement so-called extraordinary measures to prevent default since its expenditures exceed its revenue, requiring borrowing. However, these measures will become ineffective once the debt limit is reached.
Secretary Yellen, or her acting replacement if the limit is breached after Trump's inauguration, is obliged to inform Congress of this situation and detail the proceedings. The letter will likely include an estimate of the time needed for these measures to exhaust, referred to as the "X date."
According to an early analysis by the Bipartisan Policy Center, Treasury's cash and extraordinary measures should last until at least mid-2025.
"The federal government will commence 2025 with a larger cash reserve compared to the start of the 2023 debt limit debate," commented Shai Akabas, director of the center's economic policy program. "This cushion, combined with extraordinary measures and tax income in April, means that the debt limit will not be the first priority for Congress in the new year. Each bill they work on in the coming months facilitates a timely debt limit resolution."
The length of time Congress has to address the debt ceiling issue depends on factors such as tax income in the spring, spend rate of disaster relief funds, additional spending bills, and economic health, according to the center.
The consequences of a default are uncertain since it's never occurred before. Daily revenue would dictate which bills the Treasury Department can pay, including Social Security benefits and salaries of federal employees. A default could also jeopardize the global economy and financial markets, and cause yields on US Treasuries to increase, escalating borrowing costs.
Political hurdles
Although Republicans will control Capitol Hill in 2024, addressing the debt ceiling won't be straightforward, particularly if they attempt to draft legislation without Democratic support. The GOP will have a thin majority in the House, which necessitates Speaker Mike Johnson to limit defections, specifically from conservative legislators who have advocated for spending cuts in conjunction with an increase or suspension of the limit.
Trump is intensifying the pressure on Republicans. He derailed a bipartisan temporary spending agreement last month by demanding a debt ceiling resolution as part of the agreement. Congress eventually passed a short-term funding bill without a debt ceiling provision.
The president-elect reaffirmed his demands this weekend.
"Democrats must be required to cast a vote on this perilous matter NOW during the Biden Administration, not in June," Trump wrote on Truth Social. "They should be held responsible for this potential catastrophe, not the Republicans!"
GOP leaders in the House floated an idea to increase the debt limit by $1.5 trillion in 2025 as part of the first reconciliation package, which could include border security and energy provisions. The legislation would also incorporate $2.5 trillion in cuts to mandatory spending to appease conservative members.
Republicans aim to utilize the reconciliation process to pass their prioritized legislation because they would need only a simple majority of votes in the Senate, having 53 Senate seats this year.
However, even if the GOP increases the debt limit by $1.5 trillion on its own, it would not significantly postpone the issue, according to Akabas. The US would reach the new ceiling in the latter half of the year, potentially leading to a default in the first half of 2026.
The business community might express concern over potential economic instability due to the debt limit issue, as a default could negatively impact financial markets and increase borrowing costs for businesses. Moreover, any delays in resolving the debt ceiling could affect government spending, potentially impacting various sectors and services that businesses rely on.